Category: Future Requirements

Even a seasoned financial advisor can be vulnerable to certain blind spots within the field, what matters is recognizing and learning from these blind spots. Here we have gathered a list of the seven major areas in which advisors can falter, to save you from the same oversights.

1. Forgetting Time Value of Money

As an advisor, the time value of money must be applied to every calculation, and any calculation that does not take this into account is not accurate. Every dollar has a value that increases over time, or in other words, accrues interest. A common blind spot for financial advisors and clients is forgetting to account for this interest. Time value might seem minor with interest rates as low as they are, but when a cumulative sum is plugged into a calculation it loses all accuracy because the interest value is lost.

Interest rates vary depending on the scenario—whether money is being socked away into savings, paid in premiums to an insurance policy, or otherwise—but they are always necessary to include. Regular calculators don’t do a good job of applying the time value of money, which is why interest rates are often overlooked by advisors but Truth Concepts software makes the calculations of interest rates simple and makes the projections you show your client accurate.

2. Having Unequal Time Frames

It is all too easy to fall into the trap of comparing mortgage rates with unequal time frames. As with any scientific experiment, when comparing two things you must have only one variable. Often advisors make the mistake of comparing 15 and 30-year mortgages without adjusting the time frames to equal each other—a common mistake to make.

When comparing mortgages, you already have a variable, so all other components must be the same to get an accurate comparison. In simple terms, that means these mortgages must be compared at the same rates—the simplest being a 15-year mortgage over 30 years compared to a 30-year mortgage over 30 years. When advisors compare rates at unequal time frames, the data will be skewed.

3. Ignoring Opportunity Cost

Opportunity cost is closely linked to the time value of money, which can be boiled down to this: opportunity cost is the loss of a potential opportunity by taking another one. In typical financial planning, the opportunity cost is not often factored into discussions, or at least not in a way that reveals the whole truth. As with every choice, the possibility of another choice is ruled out.

When it comes to investing your money, opportunity cost can be everything—what is the opportunity cost of fees and taxes on the growth of many stock market oriented investments? What is the cost of taking out a loan with the bank rather than borrowing against your whole life’s cash value at the insurance company (or vice versa)? TC software makes it simple to map out multiple options for your client, and Truth Training shows you how through a three-day intensive course.

4. Not Understanding How Interest Rates Work

Interest rates are one of the most commonly misunderstood financial concepts, which is how banks are able to make large profits off of seemingly low rates. As a financial advisor it is crucial to understand the true nature of interest rates, so you can best demonstrate the principals to your clients. When assessing the difference between two rates, borrowing at 3% and investing at 9% may not seem too different—only a difference of 6%, right? Unfortunately, that’s the catch; banks and other companies depend on this misconception when the margin of increase is truly a 200% markup.

When working with interest rates, converting the rates to dollars can help in understanding their true nature. For example, if your client were to take out a loan of $100,000 at a 4% interest rate and invest that same amount at 5%, you can quickly see that the difference is not 1% but 25%. Learning to understand the truth behind interest rates can keep more money in your client’s pocket instead of the bank’s. Using the TC calculators make it simple to calculate these differences without needing a specific formula.

Figure 1 In this example we have shown 4%, the amount borrowed, as the present value. The future value of 5% is the amount invested. One year is the control. The difference is 25%, or a quarter increase from 4%.

Figure 2 This example serves to show the difference between a 4% rate and a 5% rate on the same amount of money over time. One percent makes quite the difference in this scenario–doesn’t look like 1% now, does it?

5. Thinking Life Insurance Only Works If It Has PUA’s

PUA’s can certainly benefit a whole life policy, but they do not make or break one. Whole life does not offer large immediate returns but requires patience to build up cash value. After 5 years a policy truly begins to pick up, which is why it’s important to encourage clients to start early to reap the most benefit from their policy. Even a minimum payment of $100/month for a young person can offer great returns only a few years down the road—and when things are looking up, it doesn’t hurt to add a PUA or increase the premium.

The best way to guarantee the failure of a policy is not to have one at all. Savings are a crucial foundation of prosperity, and a whole life insurance policy is an invaluable savings tool.

6. Believing Life Insurance Only Works If You Borrow Against It

The prospect of borrowing against the CV of a life insurance policy seems to be the biggest benefit, but it is not the only way to make a policy “work.” Life is unpredictable, and having a whole life policy in place can benefit your client in case of an emergency.

In fact, the first job of the cash value of the whole life policy should be an emergency fund, left there at the insurance company. This money creates peace of mind and financial confidence for the family so they can pursue the next phase of the policy: their opportunity fund. Many advisors know that families benefit from having large amounts of available cash value, even though they may never use it, just for the potential of being able to take advantage of an opportunity when it comes along. Additionally, the death benefit creates an immediate legacy or estate, just from the stroke of a pen. Whole life insurance provides options and thinking of it as an “and” account that has a death benefit and possibly LTC and Waiver of Premium riders helps out even more.

7. Talking More Than Listening

As advisors, it is easy to fall into the mindset that you have all of the information your client could want, so you must do all the talking. Though not entirely wrong, it is important to remember that the client is an individual, and he or she will have unique problems. Your client wants to be heard, and when you slow down and listen you might find there is a unique way to handle the situation. Typical financial planning tends to have a cut and dry formula for clients, setting up qualified plans left and right, and selling the products advisors are told to sell.

What sets a prosperity economics advisor apart is their willingness to look at the individual’s desires and provide real strategies to achieve prosperity. While it may be a smart move for one client to borrow against their CV and be their own banker, it might be more prudent for a newer client to take out a bank loan and only dip into their CV to bail them out should things go south. Families with few children will have different desires than families with many. As an advisor, set yourself apart by taking the time to listen to your client, and help them find the best strategy, instead of pitching them the typical plan.

by Todd Langford | Dec 4, 2018 | Comments Off on How To Show Your Clients the True Cost of College

The Education Calculator is a tool that illustrates the true cost of college to your clients and creates the basis of a savings model. The numbers may seem straightforward, but the calculator allows you to factor in the yearly rate of increase in tuition and interest on student loans.

It is simple to toggle between student information or parent information, which illustrates the base cost and the amount needed to be saved by the parents.

The calculator can accommodate the information of up to ten children, making the total cost of education accessible from the beginning, rather than creating extra legwork for each child. Loan and grant information may also be entered, which is helpful in demonstrating the impact of scholarships and grants on a tuition cost—and the financial consequences that can accompany a loan.

A helpful illustration to parents and children alike is to plug in the tuition information without including the rate of increase, to show the effects of inflation and how tuition can carry some “hidden” costs. The calculator demonstrates these numbers in easy-to-comprehend charts that compare the values against each other.

The calculator automatically translates the sum into the client’s assets as of the present day, which can be a helpful tool in demonstrating savings.

When you plug in the value of today’s dollar into the present value field, you can see the lifelong impact and costs of education. For some, the information is better understood in detail rather than with a chart. The calculator makes it simple to toggle between the two.

When working with your client, you may also consider using in tandem with the payment calculator, in order to break down the monthly cost of a loan or show the opportunity cost of college by plugging their numbers into the future value calculator. The information displayed through the education calculator can be a large sum to wrap one’s head around, so take care with your client while showing them the true cost of an education.

Values that should be taken away from this demonstration are the value of honoring education, the importance of a student putting significant thought into their future, and the imperative of saving.

by Jason4TC | May 11, 2018 | Comments Off on Should I Borrow Against My Life Insurance Policy?

“Should I borrow against my life insurance policy?” Are you ever asked that question? I bet you are.

Recently we conducted an annual review with a client. This client is a transfer client. They moved to our town about 8 years ago. About the same time, their other advisor retired so we were lucky. The conversation was very informative and because of the Truth Concepts calculators, the whole truth was easily demonstrated. Let’s join the conversation partly through the review…..

“I am going to purchase a new car this summer,” Mark said.

“Great idea. How are you planning to finance the purchase,” I inquired. “Remember you finance everything you buy.”

“Yes, thank you for reminding me and yes I remember that,” He replied. “You need to remember that I am my own banker. I plan to take a loan against my policy and finance the car with a policy loan,” He gleamed.

“Do you own a hammer,” I asked.

“What,” He said with a puzzled look on his face. “What does that have to do with financing a car?”

“When there is something to repair around the house do you always grab your hammer to make the repair,” I said ignoring his question for the time being.

“Of course not” He emphatically said. “I use the correct tool for the job at hand.”

“I am relieved to hear you say that,” I said with a smile. “Why are you not doing the same thing when it comes to your financial life?”

“What do you mean,” He asked.

“You told me you were going to finance your car using your whole life policy because you are your own banker,” I said. “That is similar to using your hammer to do all the repairs in your house.”

“Before you get excited about that statement let’s just take a look at a few figures. I am going to use a few calculators from my Truth Concepts software package. This is great software for me to look at a financial question or problem from a non-subjective, whole picture point of view,” I explained. “For starters, if we look at your policy that you purchased from your former advisor, it now has an IRR of about 3.1%. Remember that means that your policy is growing as if it had yielded 3.1% every year since it was first started.”

“I did not know that is what that means,” Mark said. “How does this help me?”

“Let’s assume the car you are going to purchase will cost $30,000. Using a future value calculator we can see what your $30,000 will be worth in 5 years,” I said turning my computer screen so he could see.

“Ok,” He said. “My cash value should be worth $35,023.”

“Well, your $30,000 will grow to that figure. This is an attempt to isolate the $30,000 and just see what it will do, removing additional premiums and dividend fluctuations.” I said.

“Ok so if you take a loan against your $30,000 what is the interest rate you will be paying to the insurance company,” I asked.

When I called yesterday it was 5.0%,” He answered.

Nodding to him I inputted into the payment calculator the date to get the following:

“Based on that information you will have a $566.14 a month payment going to the insurance company,” I said. “Furthermore you will pay a total of $33,968.”

“It so happens that I have been in the market looking for a new car as well,” I admitted. “I went to the credit union over on Maple Street and they are offering a car loan at 2.99%. If you were to use the credit union your payment would be $538.93.”

“And, you will pay a total of $32,336,” I said.

“Why do you want to have a $27 dollar higher car payment a month and pay a total of $1,632 more for your car,” I asked.

Mark sat there for a moment contemplating what I had shown him. Finally, he said, “Because I am my own banker. When I take a loan against my policy I will have $35,023 in cash value when I am done paying for my car.”

“Was that a statement or a question,” I asked Mark.

“Well I am not completely sure,” Mark responded.

“Please allow me to ask you a few questions to help you reason it out,” I said.

“First, if you did not purchase a car or take a loan against your policy how much will your $30,000 be worth in 5 years,” I asked bringing the original Future Value calculator to the top of my screen.

“It will be worth the $35,023 we discussed earlier,” Mark said.

“Second, since your company is a non-direct recognition company, how much will your $30,000 be worth if you do take a loan against your policy cash values,” I asked. “And by the way even if you were with a direct recognition company, we could calculate how much your $30,000 would be worth.”

“It will be worth $35,023 right,” Mark said more asking than stating.

“You are right,” I said. “Do you see it, your cash values are going to grow to the same number regardless if you take a loan or not.”

“So here is my third question, sorry it is the same question I asked before. Why do you want to spend $27 more a month or $1,621 more for your car by taking a loan against your policy versus getting a loan at the credit union,” I asked?

“I don’t,” Mark said.

“Right, you are your own banker. What that actually means is you are in a position of control. You can use your cash values if you want, but you do not have to use them. You need to figure out the cost of capital. It does not matter the source of the capital. Determine the best sources of capital and then if all other factors being equal, use that source,” I explained.

“I guess this is why I need to come to our annual reviews,” Mark said. “I am not an expert, but having someone like you and your Truth Concepts software available to me is well worth my time to meet with you. Thank you.”

by Jason4TC | Apr 6, 2018 | Comments Off on Am I Too Old To Buy Whole Life Insurance?

“I wish I would have known the whole truth about whole life insurance 40 years ago so I could have taken advantage of all the benefits you have described to me,” a brand new prospective client said to me. “I love what you are saying and it makes so much sense, but I am just too old to implement what you are talking about. At my age, it will just be too expensive. But it scares me to death thinking about running out of money.”

“Many of our clients say exactly what you just said, ‘I wish I would have known about this _____ (fill in the blank) years ago,'” I replied to George.

George had been referred to me. I had spoken with him on the telephone a number of times, but today was the first time we had ever met in person. George was 70 years old, but I would have never guessed hearing his voice over the phone. The last time I talked with him, he insisted we meet the next time my travel brought me to his hometown. When I discovered I had a conference that would bring me through, I arranged a meeting with him and his wife, Barbara.

“Let me tell you a story,” I continued. “There once was a 6th-grade class that was learning about aerodynamics. The teacher told the children that at the end of the section, they were going to have a test that would be taken in teams of two students. No one said anything but they all were thinking ‘oh I hope I do not get paired up with Tommy.’ Tommy was a rather rowdy and rough boy who didn’t seem to do well in school. Some of the kids thought he had a learning disability, while others thought he just did not care to apply himself. The second to last day, the teacher announced the teams for the final exam to be taken the next day. To Jed’s surprise, he was the one who was paired with Tommy.”

“The next day the teacher told the children to get with their partner as they all headed outside for the test. It was a warm, but slightly windy, spring day. The class was led to the playground and each given a piece of paper. ‘You are to make from your sheet of paper something that will adhere to the principles of aerodynamics we have learned about during this section of our science unit. When you have completed your task you will be judged by how far and how straight your creation flies.’ Jed was terrified as he had noticed that Tommy didn’t seem to pay much attention during science. Jed asked if Tommy had any ideas and Tommy replied he had none. Jed hurried to the teacher and asked if he and Tommy could go last. While the other students worked quickly to fold, cut, tape, and sculpt their papers, Tommy just sat there.”

“At long last, it came time for Jed and Tommy to be tested. Jed had folded a masterpiece of an airplane which he proudly stepped to the line and threw as best he could. His airplane did not go the furthest, nor did it go the straightest, but it was one of the top 4. The two of them could still take first place if Tommy would have only made an airplane and been in the top 12 of the class. Tommy walked up to the line and just stared into the distance for what seemed like a really long time holding his untouched piece of paper by the corner. He finally grabbed the paper and wadded it up into a ball and chucked it. His ball of paper went twice as far and straighter than anyone else’s.”

“George, I want you to be like Tommy for a moment,” I said. “Tommy had been taught all the laws of aerodynamics. He violated most of them, but the one thing Tommy did have was imagination. You have been taught and ‘consumerized’ to think in certain ways, but right now, let’s use some imagination.”

“Okay, I can do that,” George replied. “You have taught me a lot of great truths about what you do. So I’m open to what you have to say.”

“Ok, great. Thank you for your vote of confidence,” I smiled at him. “The first thing we are going to do is make an initial statement about whole life insurance: ‘I can spend my legacy money while I’m living by acquiring a simple permission slip.’”

“George, you have done an amazing job saving for retirement. You have accumulated a sizable nest egg of 2.5 million dollars,” I complimented him.

“Yes, but that is also the amount of money I want to pass on to my heirs. I don’t have anything else to put into a life insurance policy you’ve been telling me about. I’m too old for that to work.” George explained.

“Okay, well, for now, let’s concentrate on what you have saved. We’ll call that your legacy money,” I said. “Typical financial planning says if you can make your legacy money earn 4, you will never run out of money. If your account is growing at 4% your nest egg’s value will stay the same and you can pass that amount on to your heirs. Take a look at this Distribution Calculator,” I said pointing to my screen. “How much net spendable money will you have after you pay your taxes?” I asked.

“Looks like $76,360, which is about $15,000 more than what we spend currently in a year,” George said as he reached for Barbara’s hand.

“I am happy to hear that. This typical strategy will work if you only take out and live on the earnings of your nest egg each year. The scary thing is, what if your nest egg earns zero – or worse – loses money one year, are you prepared to go without any money that year?” I grinned at the two of them. “Not to mention that this also ignores the loss of purchasing power of your money each year – inflation often has a big impact on retirement income.”

“Inflation is something we should not ignore. My older sister is on a fixed income and they are scrambling all the time to determine what they will cut out of their lifestyle just to make the money last.” Barbara said.

“I know what you mean, and that’s exactly what I’m talking about. It’s painful for me to watch people in that situation, and it’s happening more and more often.”

“Let’s take a look at a different approach – a “wad up the piece of paper and throw it” kind of approach,” I said. “I am going to input another scenario and propose you take out $220,000 a year. As you can see you will have a net spendable amount of $196,000 for about 15 years. Under this current plan, you have to die when you are 85. Can you arrange that?” I joked

“Well if I had a crystal ball and I knew for sure, I would go along with this plan, but we simply do not know,” George said. “Let me ask you something: is the calculator correct here saying I will only pay $292,328 in taxes, while under the typical plan I pay $945,596?”

“Yes, those numbers are accurate. I guess you get the difference instead of Uncle Sam,” I said. “And, I agree with you about not having a crystal ball, so we are not going to spend the entire $196,000 each year,” I said. “I am proposing that you purchase a whole life insurance policy for $110,000 a year and then live on $83,360 a year, which is slightly more than the typical plan. I am going to include the life insurance premium in the calculator and it looks like this:”

“You have my attention, keep going,” George encouraged me.

“Now that looks like you simply have $10,000 more a year to live on, but if you look at it from a percentage point of view, this plan we are talking about is a 14% increase in your net spendable income over the typical plan,” I pointed out. “If you do not spend that much, you will save it and have it as a hedge against inflation later on,” I said.

“Please remember, at age 85 your $2.5 million will be spent. To keep you at the $83,000 we will start taking withdrawals from your life insurance policy of $60,000 a year,” I said pointing again to my screen.

This allows you the peace of mind that you will never outlive your money,” I said. “Now, please notice the amount you will pass on to your heirs when you pass away. Has it increased?” I asked.

“It is higher until I am 89, then it is a little less… can you scroll down for me?” George asked.

“Ah, that is better. Well, the amount to my heirs goes below the amount I told you I wanted to pass on when I am 89. I am not sure I like that,” George said.

“Remember what I said our beginning statement was? I can spend my legacy money while I’m living by acquiring a permission slip,” I said. “The life insurance gives you permission to spend your legacy money, as well as some other assets you have. For example, you have a wonderful home that is paid for. Do you think the kids would mind if you use some of the equity to help support yourself?” I asked.

“No, of course not,” Barbara added.

“With this death benefit in place, you have permission to use the equity in your house to help you live a little better. When you get to 89 – and I hope you are still healthy at that age – you could enter an agreement for a reverse mortgage. This should easily grant you about $50,000 a year, and it’s not taxable. Take a look at what this does to the amount you pass on to your heirs,” I said.

“Hey, I like that! It does go below the $2.5 million for one year but then starts to increase again. I like this permission slip,” George smiled.

“Do you feel like Tommy yet? Can we just take the typical plan and wad it up into a ball like Tommy did and throw it?” I asked.

“I am ready to retire,” John was quick to state at the beginning of our annual meeting.

There were several things I wanted to talk to John and Jane Jones about this year since they would be soon turning 60. But when I heard John say this, my plans for the meeting took a back seat.

“Are you serious?” I asked John. “Do you think you are ready to retire?”

“I have no idea,” John answered. “I am making nearly $185,000 a year, which is a lot more than what I was making when I started, but it sure does not seem like we are getting anywhere.”

Jon was frustrated and I needed to learn more about the source of the frustration, so I started to ask him a few questions. “Do you have any idea how long of life expectancy you have? There is a great website out there called livingto100.com. Let’s go to that site and take the short test to get a projection of how long of a life you should be planning for.”

Once we went through the questionnaire the result that came back shocked John and Jane.

“Whoa, I could end up living to age 110?”

“That is a long time. Let’s put things in perspective. You started your career when you were 25, correct? Which means you have been working about 36 years,” I said. “Taking a wild guess, do you think you can afford a retirement of 50 years, assuming you do live to 110?”

“Of course not,” John answered. “We have been good savers and you have helped us navigate a bunch of difficult financial decisions. But we have been saving less than 100% of our income. There is no way I can live for 50 years on what we have saved. Especially since our standard of living is much higher than the $45,000 salary I had when I started.”

“Is your salary really that much higher?” I asked, knowing the answer. “Let’s put your numbers into a Future Value Calculator to see what your salary should be in 35 years to have the same purchasing power, as it does today,” I suggested as I input the numbers.

“That is nearly exactly what we are making now. No wonder we feel like we are spinning our wheels sometimes,” Jane said.

“I am going to call up another calculator called the Future Requirement Calculator. Do you think you could help me plug in the numbers?” I asked.

“My current salary is $185,000. My qualified plan, as of the last statement, had $158,640,” John told me, “We are in the 28% tax bracket and we live on about 60% of our income. I will get some Social Security, so I am thinking I will need about 75% of my current income for retirement”

Does this look right? I asked.

“Yes, I guess so,” John said, “I really do not know, but the numbers you have are correct.”

I chuckled at his honest response. “You are right, so far this is not telling us much is it? When I push the ‘projections’ button the calculator will show us how much you should have in savings to make it through a loooong retirement.”

“That is depressing,” John exclaimed. “I don’t have anything near 4.6 million dollars. How will I ever be done with this job?”

“Please, don’t despair,” I reassured John. “This calculator is simply useful as a reality check. But you said it so I have to ask: why is it you want to retire?”

“I am tired of my job. I don’t like it anymore,” John admitted.

“There is nothing wrong with that,” I said. “Tons of people get bored with what they have been doing for 20+ years and they think they should retire when they should just rethink what they are doing. When a client tells me what you just told me I send them to a website called lifereimagined.org. It has a lot of great information to help when thinking about retooling for a different career,” I explained.

“I told John this idea of retiring now was not a good idea,” Jane said. “John is in good health. It is just the job that is the problem. We have actually been looking around and are thinking about starting a business.”

“Not to be too blunt here, but now you are talking better sense,” I said with a chuckle. “What kind of company are you thinking of starting?”

“Well, we think this new field of Cryotherapy has a great future,” John said. “Medicaid will actually pay a good price for people to use the equipment we are thinking of buying. But, frankly, I am not sure we can do that either. We will need to purchase two office buildings that would total $250,000. Plus two cryotherapy and two vibrotherapy machines for $206,000. ”

“John, don’t be discouraged. We have known each other for a long time. I always say you need to know the whole truth about things so you can make informed decisions. This is a great opportunity to look at as much of the truth as we can about this new business so you can make a good decision.”

“First, let’s take a look at the real estate purchases. The purchase price was $250,000, right? And the closing costs were $5,000. How much are you planning to put down?” I asked.

“We want to avoid private mortgage insurance, so we will put $50,000 down,” John said.

“Ok great. What about the taxes, insurance and maintenance costs?” I asked

“All three are about $500 each,” John responded. “And we plan to have the business pay us $2500 a month in rental income.”

“We will look at this over a ten year period,” I said and pointed to the screen, “How does that look?”

“The rate of return isn’t all that great,” John said. “I was hoping for more.”

“This is only part of the equation,” I explained. “The real money maker will hopefully be the business. For that analysis, we are going to use a new copy of the same calculator.”

I entered the numbers and asked a few questions. “What do you see as your employee costs per month as well as your insurance for the company and maintenance costs?”

“We plan to be open 13 hours a day 6 days a week. We do not want to just hire minimum wage employees, we are hoping to provide a great service and we think we will need to pay employees a little higher than most. We calculated it would be about $10,000 per month in employee costs.”

Sounds good so far,” I said. “what will it cost per visit for a client?”

“About $75. At least that is in line with what Medicaid will pay,”

“You said you will be open 13 hours a day six days a week, which is essentially 4.5 weeks a month,” I commented. “How many clients per hour will you be able to handle?”

“I am not sure how many we will be able to handle, but we think a conservative number is 2 per hour,” Jane said.

I input all these numbers in the income line and showed them the calculator.

“Now that is a rate of return I like to see,” John said excitedly.

“As I have said before, it is not about net worth, it is about cash flow,” I said. “In this case, it’s not about rate of return it should also be about cash flow, and notice how much monthly cash flow you should have,” I pointed to the screen.

“That is more than I am making now,” John said. “Maybe I can retire after all.”

I smiled at him and said, “How about we say you can retool and still have a good income?”

“OK, I like that better. I need to stay healthy and active,” John agreed and started to get up.

“Are you finished John?” I said with a grin.

“I thought we were,” he said.

“I would like to talk to you about one more thing,” I said.

“OK, go ahead,” John said easing back into his chair. He was visibly more relaxed.

“$28,000 in income from the business each month is a lot more than what you are making now. What do you plan to do with that extra money?” I asked.

“We are going to enjoy life,” John said.

Jane was a little more serious and said, “We haven’t thought that far ahead.”

“I am not changing the subject, so stay with me. What do you think has been one of your best investments so far? I mean other than the policies you have purchased because we all know that everything else you have invested in or financed was made possible by those policies.”

“Without a doubt, the cabin has been the best. It has not been a huge moneymaker, but as far as making family memories and personal value to us, the cabin wins hands down,” John said.

“I agree with John,” Jane said smiling at him. “We got it for a great price and have enjoyed it more times than I can count.”

“Exactly what I thought,” I said. “What made it possible for you to purchase the cabin?”

“The policies,” John replied.

“Technically that is a correct answer, but I am asking you to think a little deeper here,” I said.

After a moment of silence, Jane finally said, “What made it possible was our willingness to save a significant portion of our income. What I mean is, we had policies that had cash and because we could move fast, we were able to buy the cabin.”

“Exactly,” I complimented Jane. “You are not too old to save. Who knows, maybe something else will come along. Even if nothing does though you need a place to store the extra cash you are going to have with this new business. If we plan on you paying about 30% in taxes, you will easily have another $100,000 a year coming in. Is there a better place to store cash than inside a policy?” I asked.

“When we first met I thought a whole life insurance contract was the worst place to have money,” John admitted. “But now, no, there is no better place. What do you recommend?”

“I think you should purchase a policy for $50,000 a year for each of you,” I said. “You can put the purchase of those policies into your operating agreement for the business and make it official.”

“I was going suggest you purchase a 10 pay policy. That is a policy guaranteed to be paid up in 10 years,” I explained.

“Sold! Where is the application?” John asked.

“Wow, if everyone was as easy to sell policies to as you are, I would have an easier time,” I said.

“You have our trust. You have always just shown us the whole truth of things and then we make our own decisions. Not once have you lead us astray,” John said.

“It is hard to go wrong with a whole life insurance contract,” I said. “I like the peace of mind it gives me personally knowing my clients are protected and will not lose money. That means I have never had to apologize for recommending or selling a whole life insurance policy.”

“Thank you,” Jane said. “Really, thank you.”

“Let’s get the applications filled out,” John said. “I want to celebrate our decision for me to retool!”

John and Jane met with me regularly, mostly to touch base about their progress as they improved their financial position, or to discuss potential investments. But when their oldest son, Todd, turned 16, we met to discuss a major item that impacted their entire family. Both John and Jane were now 48 years old. During my telephone call to set a time and date for our meeting, John made a comment about how frustrated they were because of their boy. Todd was not a very serious student and his grades had suffered as a result. They were concerned that Todd would not be accepted into college he wanted to attend; there certainly wasn’t any hope of a scholarship to help financially with his advanced education.

As we talked further, it became very clear that having their children get a college education was very important to both John and Jane; the same goal did not seem quite as important to their two children. We talked briefly about some costs associated with college that most people don’t consider. I offered to explain those costs in further detail, and suggested it would be very helpful if the two boys were part of the discussion. They agreed to bring the boys to our meeting.

I knew I would have to be at the top of my game to keep the two teenage boys’ attention long enough for them to realize the real cost of a college education. Knowing the simple price tag of a college education wasn’t enough; they needed to comprehend the real costs of college, and the impact those costs would have on their parents’ and their own futures. Opportunity costs of a college education can be rather sobering, which is exactly what I was hoping it would be to the teenagers. Perhaps it would help them understand the need to more serious about their plans.

Opening the door to our offices, I greeted the four of them, “If it isn’t the Joneses! Nice to see you. Come on in. We will meet in the conference room instead of my office since you two boys are with us today.”

Extending his hand, John said, “Hi. I have been looking forward to this meeting since we talked on the telephone.” Then motioning to the two boys, he said, “This is Todd, he is 16 and that is Jason, he is 14. And no, they are not that excited to be here.”

I shook both of their hands and asked, “I gather you two are fairly fast runners. Is that correct?”

“Uh, what? I don’t know what you mean. Who told you that?” Todd said as he tilted his head.

“Well, I have a lot of clients blame all their debt on the fact that they are trying to ‘keep up with the Joneses.’” I answered, knowing it was a corny joke, but wanting to engage the boys.

John laughed heartily. The boys groaned but smiled, which I took as a good sign.

“There is a fridge right there, why don’t you two grab a soda. There are some snacks in the cabinet above the fridge. Help yourself.”

As we sat down, I began to ask the boys a series of questions to engage them and get their attention. I learned the two of them were hoping to go to college but had not considered how they were going to pay for it. They had both just assumed that Mom and Dad would fund everything. Neither one had a clear idea of what they wanted to study once they got to college.

“Your parents have been working with me for over 20 years now. They will tell you that one of the things I say all the time is you finance everything you buy,” I said looking at John and Jane. “Is that correct?”

They both nodded and John spoke up and asked, “Do you understand what he just said?”

“Not really,” Todd answered. “When I go to Costa Vida with my friends I use my debit card to pay, so I don’t finance anything, I pay cash for it. Well, as good as cash.”

“Let’s say the bill for your dinner with friends is $10. If, instead of having dinner though, you decided to put that money into an account that earns 5% interest. In 10 years, your $10 would be worth how much?” John asked.

John was explaining to the boys a concept I had planned to talk about. I was pleased by his direction and I swiftly brought up a Future Value Calculator and put in the numbers. There was a projector in the conference room so everyone could see well.

“I don’t know,” Jason said.

“I have several calculators that we’ll use today,” I explained. “This one shows the value of something in the future.” Then pointing to the answer, I said, “What does this future value calculator say your $10 today would be worth when you are 26?”

“That much?” Todd said.

“What this calculator is showing you is the opportunity cost of your $10 dinner over ten years, is $6.29,” I said. “So really, the full cost for your dinner was $16.29. And will that cost ever stop increasing? Of course not,” I continued, answering my own question. “But the more important question is, “Who gives up the money so you could have that $10 dinner?”

After a short pause, Todd said, “I guess I am the one giving up money. But are you saying I should stop eating? If you are, we can be done right now, ‘cause that ain’t going to happen.”

I just chuckled. “I have teenage boys myself. The most common thing they say to me is, ‘Dad, I’m hungry.’ No, I am not saying you need to stop eating, but I do want you to understand that we finance everything we buy, so we should be smart with what we buy and how we finance what we buy. If we purchase things – and I am talking about the more expensive items now – in the most efficient manner, we can minimize our opportunity costs. And that’s extremely important.

“If we minimize our opportunity costs, who will end up with that extra money?” I asked.

Jason was quick to answer, “the one doing the financing – so, me.”

“Exactly,” I smiled at John and Jane. “You have a couple of smart ones here.”

“Let’s take a few minutes and talk about one of the biggest purchases you will make in your lifetime: a college education.”

I brought up the Cost of Education Calculator and started to input their names and ages. Where are you hoping to go to college?” I asked Todd.

“Arizona State hopefully.”

“Great. And what is total for the tuition, room, books, and other expenses for Arizona State?” I asked.

“I have no idea,” Todd frankly admitted.

“That’s okay, I looked it up. The average cost for a year at Arizona State last year was $25,000.” But do you know that costs are also increasing every year? Right now the national average is 7% per year,” I said and put those numbers in the calculator. “So, what will be your bill to go to Arizona State for 4 years?” I asked pointing to the number.

“That is a big number,” Todd looked mildly discouraged. “That tuition increase of 7% per year makes a big difference. I thought it was only going to be $100,000.”

“That is assuming you only take 4 years to graduate; but did you know the average student takes over 5 1/2 years to graduate?” I asked. Let’s see what that does to the cost.”

“Whoa, almost $80,000 just for 2 more years? I guess it would be a good idea to graduate in 4 years,” Todd said.

Turning my attention to Jason I said, “You are two years younger and I hear you want to go to Purdue University. The cost there is slightly more, it is currently $30,000 per year. What is the bill for your college degree?” I asked pointing to the screen.

“I can’t afford that,” Jason lamented.

“Now, did you two notice how I asked my question about the cost of your college education?” I asked.

They both stared at me. I looked to John and Jane who looked similarly confused, so I asked again, this time emphasizing the key word, “What is the bill for your college education? I intentionally used that word because the numbers on this calculator are not really the costs of your education. Those numbers are simply the amount for which someone will write the check. The total bill for both of you, is $127,082 + $174,596 = $301,678. But to understand the full cost, we have to consider opportunity costs.

“Let’s assume for a moment that you are just going to get student loans that don’t require payments until 6 months after you graduate. What is the starting salary for someone graduating in one of the fields you are considering, Jason?” I asked.

“Roughly $40,000 a year,” Jason answered.

“Great, thanks,” I said. I opened a Payment Calculator and input a loan amount of $174,598 and an interest rate of 4% for 20 years. “Here is your monthly payment.”

“Wow, that is a house payment,” Jane sighed.

“If you’re making $40,000 and were to get paid monthly, the gross amount of that check would be $3,333.33. If you are single, or married and your wife works, you will pay roughly 25% in taxes, which would leave you $2,500 a month to live on. Your student loan payment would be more than 42% of your take-home pay,” I explained. “The total amount you will pay back on that loan of $174,598, is $1,054.51 x 240 = $253,082.40.”

I waited for a moment to let that realization sink in. I then asked, “So, is the $253,000 the total cost of your college degree?”

“I am guessing it isn’t,” Todd replied.

“And you guessed right. What if you didn’t take a loan and saved $1,054.51 in an account that was earning, say 4%?” I entered the numbers and put it up on the screen.

“This is depressing,” Jason said. “I could have all that instead if I didn’t have to get a loan.”

“When we first came in here I asked you, two boys, how you were going to pay for your college education. Both of you were unsure, but sort of thought your mom and dad were going to help you. Let’s take a look at what paying the bill for your college education will cost your parents. This calculator can look at the same scenario from your parents’ point of view,” I explained.

“This is a bit more complicated, so let me explain it a little. I put in your parents’ age of 48. I am assuming they would retire at age 65 and exit this life when they are 90 years old. I am also assuming they can get 4% growth on their money. This calculator shows us that your parents would need $250,909 saved TODAY, and have it grow at 4%, to be able to write checks totaling $301,678. Or, starting right now, your parent will have to save $35,834 every year for the next 8 years to fund your education. Writing those checks for $301,678, also means your parents lose out on $508,295 at age 65.”

“Here let me modify the calculator so you can see that better,” I said.

“The green indicates what the value of the $250,909 they have saved will be if it grows at 4% until they reach 65 years old. The red rectangle labeled Asset Reduction is the amount your parents’ lose if they write the checks for college. That is the cost to your parents for ‘financing’ both of your college educations.”

“The red bar on the far right shows your parents will have to go without $26,719 every year in retirement from age 65 until age 95. If we multiply that yearly figure by 31 (the years of their retirement), we arrive at a figure closer to the real cost to your parents of financing your education: $828,289.” I said it slowly to make sure they were grasping the whole truth of what I was saying.

As you can imagine, there was silence in the room for a little while. Finally, Jason spoke up and said, “I am not sure I want to go to college now.”

“Don’t say that,” John said. “I work hard every day with the hope of providing a good life for you two boys. I did not have much growing up since my parents went through bankruptcy and some other financial storms. I want to give you something better.”

“He’s right,” I said to Jason. “Your parents want the best for you, and I do too. The purpose of this meeting wasn’t to convince you not to go to college. The reason we wanted to have this meeting was to open your eyes to the extreme cost of a college degree. Many people don’t think about it this way until it’s too late, but I hope you see now the real cost of just going off to college to party for a while and ‘find yourself’ as so many kids do; or even the cost of taking a couple of extra years to graduate because you can’t decide what you want to do with your life.”

“I had no idea college would cost this much,” Jason spoke up. “Maybe I need to be more serious in class so I can possibly get some scholarships,” he conceded.

“That is a great start,” I complimented him. “What else could you guys do to lessen the potential costs to your parents?” I asked.

“I could pay some of the cost by treating my parents’ ‘financing’ as a loan, and pay them back the same way I would pay any other financial company,” Todd offered.

“Another great idea,” I said and smiled at John. “I think you two are getting the idea. This discussion needs to be an ongoing discussion between the 4 of you. Your parents have worked hard and have some assets inside a whole life insurance contract that might be a source of most of the funds you need for a college education. But those funds are also earmarked to help provide for your parents when they are older and don’t want to work a full-time job. We must make sure that money is used wisely and taken care of so it’s there for them when they need it most,” I said. The boys nodded.

I looked at John and Jane and said, “I think our meeting has been a success. I will let you two take it from here. As always, keep in touch.”